Liability in Markets for Credence Goods
Yongmin Chen (),
Jianpei Li and
MPRA Paper from University Library of Munich, Germany
We study the role of liability in disciplining an expert's behavior in a credence good market. The expert, who can provide two potential treatments for a consumer's problem, may misbehave in two ways: prescribing the "wrong" treatment given his private information, or failing to exert proper effort to diagnose the problem. We show that under a range of liability rules, the expert will choose the efficient treatment based on his information if the price margins for the two treatments are close enough. Moreover, a well-designed liability rule can motivate the expert to choose efficiently both the treatment and the diagnosis effort. This efficiency result continues to hold when the expert's diagnosis effort generates only a noisy signal about the nature of the consumer's problem, provided the signal is sufficiently informative.
Keywords: Credence goods; private information; diagnosis effort; undertreatment; overtreatment; liability (search for similar items in EconPapers)
JEL-codes: D82 I18 K13 L23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-law, nep-mic and nep-mkt
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